The paycheck protection program processing fees are expected to provide much needed compensation for the higher loan loss allowances associated with the payroll. coronavirus epidemic.
Small and medium-sized banks are expected to glean millions of dollars in fees, ranging from 1% to 5% of the value of a loan, for their role as intermediaries in the government’s efforts to help small businesses affected by the pandemic.
The timing of fees, which are expected to be paid to banks over the next few quarters, is fortuitous, especially for lenders who have delayed compliance with the Current Expected Credit Losses standard and for CECL adopters who may need to be even more. aggressive with reservations in the future.
Banks that have delayed the CECL, which requires lenders to set aside funds for potential credit losses when loans are granted, must comply when the national emergency ends or December 31, whichever occurs first.
“Provisions is the big story, and if you have a way to make up for it with [fees from] these emergency loans are a big plus when the outlook for everything is really not clear, ”said Bert Ely, president of Ely & Co., a consulting firm in Alexandria, Virginia.
While many banks have proceeded with the CECL, some have resisted, preferring to wait and see if they can get more clarity on the economy and financial fortunes of their clients.
“You’re essentially delaying the inevitable but, in fairness, trying to make real economic forecasts under these current conditions is almost impossible,” said Damon DelMonte, analyst at Keefe, Bruyette & Woods.
And the delay may have helped these banks allocate the time and resources to process more PPP requests.
“The advantage of waiting to implement [CECL] is that we will have a better view of the impact of this pandemic, of the government’s stimulus programs and of the impact of our own initiatives… Ind., corporate earnings call.
The first dealers with assets of $ 12.7 billion received approval of $ 750 million in loans during the first execution of the PPP. Based on an estimated average processing rate of 3%, the company could net $ 22.5 million in fees. Its provision in the first quarter, by comparison, was $ 19.8 million.
Paycheck Protection loan fees will also help ServisFirst Bancshares in Birmingham, Ala., Offset higher lending costs, CEO Tom Broughton said during the company’s earnings call. The company with $ 9.4 billion in assets has also delayed compliance with the CECL.
ServisFirst secured the approval of more than 3,000 loans totaling $ 914 million before the initial PPP funding expired. That could translate to more than $ 27 million in fees, compared to a provision of $ 13.6 million in the first quarter.
“We expect the program to be cost effective,” Broughton said. “And we think this will be a nice addition to our loan loss reserve in the second quarter.”
The paycheck protection fee could also benefit banks that have incorporated the CECL, but may feel the need to significantly increase their allowance for loan losses in the face of increasingly negative economic forecasts.
The Commerce Department said on Wednesday that gross domestic product fell at an annual rate of 4.8% in the first quarter, marking the first decline since 2014 and the largest contraction since the 2008 financial crisis.
Pinnacle Financial Partners in Nashville, Tenn., Is preparing to increase its reserves this year after recording a provision of nearly $ 100 million after implementing CECL in the first quarter.
The company with $ 29.3 billion in assets was able to secure $ 1.8 billion in PPP loans approved in the first phase of the program, generating fees estimated at $ 50 million. Pinnacle is participating in the current installment of the program.
The fees will be “significant compensation” for the first quarter provision, Pinnacle President and CEO Terry Turner said during the company’s quarterly call.
Wintrust Financial in Rosemont, Ill. Has similar expectations.
Its provision, taking into account the CECL and the pandemic, was $ 53 million. The company with $ 38.8 billion in assets was approved to make 8,900 PPP loans worth $ 3.3 billion in the first iteration of the program, representing nearly $ 100 million in revenue commissions.
This will cover the first quarter’s provision and potentially needed additions, CEO Ed Wehmer told analysts during his company’s call.
The paycheck protection income “will act as a reserve for us – a cushion, in our view, for any eventuality that may arise,” Wehmer said.
Not all banks can count on high PPP fees to offset higher provisions, industry observers have said.
Smaller banks, despite concessions from lawmakers and PPP agencies, generate light volume, said Joseph Bonner, founder of Community Bank Advocates.
“I think most of the small banks that have tried to participate in PPP have done so to help small businesses in their communities where possible, not to earn additional fees,” Bonner said.